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The end of the marathon?

2012-02-21 11:23:13

The Greek crisis

Feb 21st 2012, 5:47 by The Economist | BRUSSELS

I HAVE learnt that marathon is indeed a Greek word. Thus spoke Olli Rehn, the

European monetary affairs commissioner, at the end of a 14-hour negotiating

session that produced a second bailout package for Greece this morning.

This had been agreed in principle at a European summit in July last year. But

political turmoil in Greece, hesitation in the euro zone and an ever-worsening

fiscal hole caused by an ever-deepening recession made the deal elusive for

months.

It was concluded before dawn this morning after finance ministers, the European

Central Bank and representatives of private creditors squeezed the numbers to

produce a package that was deemed both politically acceptable to creditors and

provided Greece with something it reckoned to be sustainable.

As explained in my earlier post, the negotiators were working within

self-imposed constraints. According to the final statement, the deal is

expected to bring down Greece s debt ratio to 120.5% of GDP in 2020, while

requiring no more than 130 billion ($173 billion) in additional finance in the

coming two years. To square the circle, ministers have applied the file to

several aspects.

- Private creditors have accepted a haircut of 53.5% of the nominal value of

Greek bonds they hold, plus a reduction in the coupon for new bonds, starting

at 2% and rising to 4.3% from 2020. This amounts to a loss of net present value

of about 75% (up from the 21% originally agreed in July).

- A 50 basis-point reduction in interest rate charged by euro-zone members on

their bailout loans to Greece, applied retroactively. This is justified by

reference to the profits that will be made by the European Central Bank (ECB)

on the discounted bonds it had bought earlier in the crisis. This will be

redistributed to national central banks, which will pass them on national

governments. This roundabout flow is to avoid any semblance of monetary

financing of Greece.

- By contrast, governments promise to pass on directly to Greece any profits

made by their central banks on Greek bonds they currently hold.

All this is made conditional on Greece completing a set of prior actions by

the end of the month for example, reducing the minimum wage to make labour

markets more flexible and submitting to an enhanced and permanent monitoring

of European Commission officials in Greece.

In particular, Greece will be expected to deposit a quarter s worth of

debt-service payments into a segregated account that will be monitored by the

troika (made up of the commission, the ECB and the IMF). Over the next two

months Greece has promised to adopt legislation ensuring that priority is

granted to debt-servicing payments , with a view to enshrining this in the

constitution as soon as possible . These arrangements may not amount to the

budget commissar once threatened by some creditors, but the effect may be

pretty much the same.

Christine Lagarde, the IMF head who attended the meeting, declined to say how

much her organisation would contribute. But it is clear it will be not be the

one-third share that the IMF has so far borne in euro-zone bailouts.

Mrs Lagarde also made clear that the IMF s view would be coloured by whether

the euro zone creates a more credible firewall against contagion. This would be

done by allowing the current temporary rescue fund, with about 250 billion of

lending capacity, to run alongside a permanent new system with about 500

billion. A decision is expected at a European summit on March 1st.

The euro zone claims all this amounts to a comprehensive blueprint for putting

the public finances and the economy of Greece back on a sustainable footing .

But a leak of the troika s debt-sustainability analysis makes clear that the

second bailout may well fail. In adverse conditions, ie if Greece does not

enact structural reforms, the debt ratio could remain at 160% of GDP in 2020.

The politics of imposing a near protectorate on Greece may turn yet more

poisonous (see my earlier post on the depiction of German leaders as Nazis.)

Mrs Lagarde makes no secret that there are downside risks . But she argued

that, by placing greater focus on reforms to boost Greece s productivity rather

than simply on reducing the budget deficit Greece will have a better chance of

returning to growth. European assistance and close monitoring increases the

chance of success.

Still, helping Greece remains a huge gamble, and today the euro zone has just

agreed to double its stake.

(Picture credit: AFP)